2006 (8) TMI 115 - HC - Income Tax

High Court ruling: Guarantee commission deductible as revenue expenditure; exchange loss insignificant; claim denied due to quashed demand.

The High Court held that the guarantee commission paid by the company for deferred payment constituted revenue expenditure, allowing the deduction claim. ... Guarantee commission would constitute revenue expenditure not capital expenditure – amount demanded by UOI according to demand under the Drug Price Control Order has already been quashed by Delhi HC so question of entitlement of deduction doesn’t arise Issues:1. Whether the guarantee commission paid was on capital account and disallowableRs.2. Whether the exchange loss amount was disallowable as capital expenditureRs.3. Whether the claim for a specific amount was allowableRs.Analysis:1. The case involved the assessee, a company manufacturing antibiotics, claiming a deduction for a demand under the Drug Price Control Order (DPCO) for payment to Drug Price Equalisation Account (DPEA). The Assessing Officer denied the claim as the liability was not quantified due to pending litigation. The CIT (Appeals) and Tribunal upheld the decision. However, the High Court referred to Supreme Court judgments stating that guarantee commission paid for deferred payment constitutes revenue expenditure, favoring the assessee's claim.2. The second question regarding an exchange loss amount was not pressed by the assessee due to its smallness, and hence remained unanswered.3. The Tribunal initially disallowed the claim of the assessee based on pending litigation challenging the demand under DPCO. However, subsequent events revealed that the High Court quashed the demand, and appeals were filed. The High Court held that in the changed scenario, the assessee was not entitled to any relief as the demand had been quashed, and no tax liability existed. The judgment in the matter of Kedarnath Jute Manufacturing Co. was deemed inapplicable due to the circumstances, and the assessee was not entitled to any deduction. The High Court disposed of the Reference accordingly, denying relief to the assessee in the changed circumstances.